CKCC Research Desk Initiates Coverage of FXEN with Buy Rating and $9 Price Target

Northern, WI 9/16/2011 (PennyPayDay) – CKCC Research Desk initiated coverage of FX Energy (Nasdaq:FXEN) this week with its standard e-mail announcement (see below for details). As I write, shares of FXEN were down 3 percent at $5.17 per share on volume of just over 100,000 shares.

We are resuming coverage of FX Energy, Inc. (Nasdaq: FXEN) with a BUY rating and a price target of $9.00. FXEN is a Salt Lake City, Utah-based E&P with an attractive portfolio of natural gas exploration projects in Poland and an early-stage oil development project in the Alberta Bakken of Montana. Natural gas in Poland comprises most of the company’s total production and reserves. The firm entered Poland about 16 years ago and has since built an attractive inventory of high impact natural gas exploration projects.

• Exploration activities are ramping up in Poland, with a number of near-term projects having the potential to more than double the firm’s reserve base. The company is currently drilling the Kutno mega-prospect with estimated gross upside potential resources of ~900 BCF (~450 BCF net). About mid-year 2012, FXEN plans to drill the Lisewo SE prospect with estimated gross upside potential resources of 350 BCF (~170 BCF net). Additionally, the company plans to drill a number of smaller prospects near recent discoveries that have the potential of adding incremental production and reserves.

• Market fundamentals are bullish for Polish natural gas prices. Upward trending natural gas prices in Poland over the past decade is attributable to a decline in European domestic supply, a higher demand for a cleaner burning fuel source, and an increasing dependency on Russian imports that links oil and gas prices in a rising oil price environment. As gas prices increase, PGNiG, the Polish state-owned oil and natural gas company, solicits regulators to increase tariffs to cover costs. The price FXEN receives for gas is based on that tariff. During 2Q11, FXEN’s average natural gas price in Poland was $6.36/MCF, more than 50% higher than Henry Hub gas price in the U.S. during the same period.

• Proof of concept testing is underway in the Alberta Bakken, where FXEN is the operator and holds a 33% working interest in 75,000 acres. So far the company has drilled two vertical wells to collect geologic data and determine horizontal well placement. The company plans to complete two horizontal wells with a multi-stage frack to test production rates and to evaluate well economics. Assuming positive results, the next step will be to appraise the acreage with additional horizontal development. If successful, these efforts could lead to hundreds of oil-rich net drilling locations on FXEN’s leasehold.

• Valuation: Our $13.10/Share NAV allocates $4.73 for risked 2P reserves adjusted for balance sheet items and $8.38 for potential resources from risked high impact exploration projects. At the current share price, FXEN trades slightly above proved PV-10 value, which means that the upside exploration potential can be secured for very little investment cost.

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